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The new Liberal government's election promise to lower tax-free savings account limits (TFSAs) and raise taxes for well-off people has generated quite the wave of nervous speculation.
My e-mail in-basket has been filled in the past week by people wondering how and when these measures will be implemented. The government will settle these matters in the weeks ahead, but for now let's consult some tax experts to see how things might possibly shake out.
On TFSAs, the Liberals could retroactively lower the $10,000 limit for 2015 or, much more likely, start fresh with a new set of rules for 2016. But what will those rules be?
Mark Goodfield, a partner at BDO Canada LLP, believes the Liberals may announce before year's end that the cumulative TFSA limit starting next year will be $42,000. That would factor in the $5,000 limit from 2009 through 2012, the $5,500 limit for 2013 and 2014 and $5,500 limits for 2015 and 2016. What about the current $10,000 limit for this year? Mr. Goodfield sees the government making this a moot point by limiting people who contributed $10,000 this year to just $1,000 in 2016, which would effectively be $5,500 a year for 2015 and 2016.
"This would clear the whole issue," Mr. Goodfield said in an e-mail. "Those who contributed the extra $4,500 in 2015 will only have another $1,000 to contribute in 2016 and they will be warned in advance that if they overcontribute, they will be subject to a penalty."
The Liberals could also simply keep the $10,000 limit for 2015 and announce that the cap next year for everyone is $5,500. In that case, it would make sense to top up a TFSA for 2015 if you haven't already done so. The risks here are, one, that you only get $1,000 in room for next year or, two, that the government retroactively reduces this year's limit back to $5,500. This latter outcome is considered unlikely and, if it did happen, shouldn't penalize people who made late TFSA contributions this year.
"You're within your right to top up your TFSA to $10,000 today," said Wilmot George, vice-president of tax, retirement and estate planning at CI Investments. "If the government decides to make the change retroactive, the person who made a contribution today will be treated the same as the person who did it earlier."
Another topic of interest with readers is the effect of income-tax changes for high-income Canadians. The background here is that there are currently four federal tax rates, the top one being 29 per cent of taxable income over $138,586. The Liberals have promised to create a new 33-per-cent marginal tax rate that would apply to incomes of more than $200,000. However, they are also cutting the tax rate on income between $44,700 and $89,401 to 20.5 per cent from 22 per cent, enough to produce a maximum savings of $670 per person.
The understanding among accountants is that everyone will benefit from the drop in the middle tax bracket, while only high earners will be affected by the new top tax rate. If so, then taxes won't be higher until incomes exceed $216,750. At that level, you'd pay $670 in additional tax as a result of the adjustment in the top tax rate (an additional four percentage points of tax on $16,750), but save $670 as a result of the drop in the middle tax rate.
Ann Galvin, partner at the accounting firm Stern Cohen in Toronto, said the Liberals could still fine-tune their tax policy to claw back the $670 in tax savings for high earners. "But I think it would generate a lot of ill-will among the $200,000-plus taxpayers, especially since this hasn't been mentioned to date."
Readers have asked for confirmation that the new 33-per-cent marginal rate applies strictly to income above $200,000. This is correct – marginal rates apply only to income within a set range, not to your entire income. This point is worth noting if you live in Manitoba, Ontario, Quebec, New Brunswick or Nova Scotia, where the combined top federal-provincial marginal tax rate will be above 50 per cent once the Liberals' new measures take effect. "The average tax rate that most individuals are going to be paying is well below 50 per cent," said Stern Cohen's Adam Morke.
As with TFSAs, there's uncertainty about when the new income-tax rates will take effect. It would be easiest, of course, to start fresh in 2016, and Mr. Morke said the financial projections in the Liberal election platform suggest the party will do exactly this. Still, applying the new rates late in 2015 on a go-forward basis possibly even a retroactive basis is theoretically possible.
Rob Carrick